The expansion of Russia’s bilateral trade with China has been well documented over the course of 2022, with growth thus far calculated, according to the Chinese Customs Ministry at being 32% while reaching a record US$172.406 billion between January and November of this year.
The issue is that much of this is assumed to be China’s purchasing of cheap energy. That is not necessarily the case. In this exclusive report we identify Russia’s 2022 trade with China broken down on a regional rather than purely single country basis – a unique insight as much of China’s energy trade with Russia originates purely from one region – Siberia. In fact Russia comprises of 46 Oblasts (Provinces) 22 Republics (Semi-Autonomous Regions), 9 Krais (legally the same as Oblasts, the wording is archaic), 4 Okrugs (Largely Autonomous regions with distinct ethnic populations), 3 Federal Cities (reporting directly to Moscow rather than to a regional Government) and 1 Autonomous Oblast (the Jewish region of Far East Russia).
While delving into detail in such a wide-spread region is beyond the remit of this article, we have noticed that increasingly, Russian regions are taking their own initiatives, depending upon their geographic proximity to other regional markets throughout Eurasia in developing their own new trade and supply chains. We have previously commented on the following Russian regional trade initiatives as follows:
Chelyabinsk
Chuvash Republic
St. Petersburg
Tatarstan
Tomsk
This illustrates that the decision-making ability to actively engage in Russian trade East has been decentralised and that Russia’s various regions are now highly active in looking at developing new trade and investment corridors. This is especially true of China, yet is little understood in the West as these Russian regions are so far away. Yet as we pointed out two years ago, the Russian Far East has been attracting 32% of all Russian foreign investment, primarily driven by Asian investors. While due to the Ukraine conflict Japanese and South Korean investments may remain fallow for awhile, the same cannot be said for China, and even India, engaging in shipbuilding and energy activities in the region to feed its own growing economic boom.
Here though we concentrate on China and examine its impact on Russian trade, investment and especially within Siberia and the Russian Far East.
Key China trade with Russia statistics
Target for US$200 billion in Russian-China bilateral trade
The Russian regions’ interaction with China follows the pace of its relation as shaped by political leaders Putin and Xi. In light of Russia’s rapprochement with China due to the events in Ukraine, China is set to become Russia’s top trade partner and provide a window to global markets, topping USD136 billion (+32% YoY) in trade as of November 2022.
Increase in Chinese oil imports from Russia since February 2022
China has proven a dependable ally, providing a floor for Russian oil exports
In the same way that China offered a lending hand in the form of abstentions on the international stage and a buying spree for Russian weapons following Russia’s 2015 intervention of Syria, China has not only maintained but significantly increased dependence on Russian oil as other countries had severed ties with Moscow.
Structural improvements in trade climate to benefit regions
New solutions are being found to drop barriers to trade between China and Russia:
Infrastructure is improving. As a first project of the sort, the Amur River separating the two countries in the Far East has been bridged and is likely to become a key import-export route for the country.
Blagoveshchensk-Heihe bridge across the Amur River: Opened in 2022
An opportunity for the Far-East and Siberian Federal Districts?
Typically considered resource-rich appendices to the Muscovite centre, the provinces in the Far-East (in blue) and Siberia (in green) have the opportunity – and are already becoming – far more important economically. This is true both as a logistics and transport hub, but also as future production and manufacturing centres close to their Asia end-users. That is assisted by Russian having no energy supply-demand fault lines meaning output can be maintained and maximised.
Russian Federal Districts bordering on China.
Russia to make the most of preferential trading zones
The Heilongjiang Special Economic Zone and similar areas in Dunnin, and Suifenhei are being leveraged by Russian market actors. Bilateral trade in these trading zones was up 72.8% in H1 2022. There are an additional 15 dedicated trading areas along the Russia-China border, including Manzhouli, which uniquely as it sits on the triumvirate of Russia, China and Mongolia, can combine products from all three countries together for processing and re-export. It is connected to both the main railway to Beijing and the Trans-Siberian to Moscow.
Trade in goods
2022 Far-East Federal District (DFO) trade year-to-date with China, as of 01/12/2022
Encouraging figures for 2022
Notwithstanding China’s only partial re-opening and the importance attached to the no-COVID policy, figures for trade with China are likely to be boosted as soon as the country opens up durably with current figures reflecting redistributions in import and export post-sanctions. Interestingly, Vladivostok and its region is responsible for only less than half of Direct Factory Outlet (DFO) trade with China – meaning surrounding regions and bordering territories have an important role in trade.
DFO-China trade overview
More than just a recent phenomenon
A simple analysis of DFO-China trade shows the Russian region’s yearly current account surplus has doubled over the past 5 years, while turnover has increased by US$5 billion (+55%). That said, turnover was still an impressive US$9 billion in 2017, testament to Russia gradually weaning off trade with Europe and progressively scaling up its exchanges with China as a hedge against future sanctions. The speed and intensity of sanctions against Russia in February are a real challenge and will be a test of Russia’s resolve and flexibility. Transaction costs will rise for Russia as China will not simply give Russia a blank cheque, aware that Russia has no option but to turn to its Asian partners – especially for imports of capital.
Composition of DFO-China exports in % terms, 2021
91% of exports to China from the Far-Eastern Federal District are unfinished goods needed for China’s economy to maintain its fantastic rates of production and export of finished goods across the world that would not be as well-off without Russian-origin energy and ores in particular. The current crisis will also put pressure on Russian exports to be sold cheaper as the pool of buyers is now more limited, which is a positive development for Chinese industry.
Composition of DFO imports from China
DFO imports predictable
In a trade picture that does not differ much from the rest of Russia, finished goods and value-added products are the main imports of the DFO region for China. Interestingly, metals are also an important component – likely the rare earth metals needed for high-tech production in Russia and whose export China mostly controls.
Overview of SFO- China trade, 2022 YTD
China is the top trade partner for the Siberian Federal District, but other Asian players are arriving
According to local authorities, the Siberian Federal District’s (SFO) top trading partner is China, with whom a fifth of the region’s turnover is generated. Previously important export destinations included the EU, USA and Ukraine; while a drop in overall trade is likely through to 2023 it is expected China and other South East Asian states will be the SFO’s main (and only) conduit for trade. India will be a major part of this, with Vietnam – which already has a Free Trade Agreement with Russia via the Eurasian Economic Union – another player. The Chennai-Vladivostok maritime route is already operational – Vietnam’s HCMC Port is en route.
Composition of SFO trade to China – top categories
SFO trade composition does not differ from typical picture
Similar to the DFO trade, and true to Russia’s comparative advantages as a natural resources exporter, Russia’s top exports involve oil and – interestingly – coal from the Kuzbass region in Kemerovo Oblast, Western Siberia.
Investment Projects
China footprint in DFO’s Vladivostok and Primorsky Krai, as of 12/2022
China crucial to DFO future
Though only a fraction of the amount of DFO regional trade with China, investments in the region are being led by the People’s Republic and its companies. Most recently as reported in local media, KitayStroy, China Railway Construction Company, HuaSun, H3C and Geely have all expressed interested in, or are already developing projects in the region. The hopes that the region pinned on Japanese investments were lost when it joined Western sanctions against the country and pushed for divesting from Russia – with the exception of Sakhalin energy projects key to Japan’s economic interests.
Regional focus: Buryatia
Buryatia is a Republic State of Russia located in southern Siberia around the Lake Baikal region. Formerly part of the Siberian Federal District, it has been a part of the Russian Far East since 2018. Its capital is Ulan-Ude, which sits as a main hub on the Trans-Siberian and Trans-Mongolian railways with connections through to Ulaan Baatar (Mongolia), Beijing and Vladivostok. West it connects with numerous Russian cities and onwards to Moscow, making it an important regional trading hub and connectivity point between East Asia and Europe.
Top ten Buryatia export partners at 2021e, USD million
Resource base for Asian markets far and wide
Valid as at the end of 2021, the above figures demonstrate interest for this part of Russia as a base from which to furnish industry from both Japan – very active in neighbouring Mongolia – but also Taiwan as a balance to mainland Chinese trade. Looking ahead, India, Vietnam, Malaysia and Indonesia could be potential partners that Russia can leverage as populations in the former rise and resources from become more scarce. All have sent recent, high-level delegations to the Far Eastern Economic Forum to discuss trade and investment in the region with the Russian government. Vladivostok may seem distant but it lies just a week in maritime distance away from Hong Kong. From there, another six days rail terminates in Moscow. Twenty important Russian cities lie along the route.
Buryatia Investment Snapshot
Proximity to Mongolia and China is attractive
At the crossroads of Russia’s Asian regions and bordering on the Baikal Lake, Buryatia benefits from close ties to China and Mongolia – key to both Russian import and exports. On top of Mining and Metals that are the region’s main assets, it has a complex industrial (aeronautical) history producing famed helicopters but is also a leader in domestic tourism. The local government is especially active in promotion of investments, with simplified regulations and subsidised energy prices.
Composition of Buryatia’s export, % of total trade
Summary
As can be seen, there is plenty of potential for growth and development in the Russian Far East, and especially in regards to developing trade with China and South Asia. Largely ignored by the West, the regional connectivity has massively improved as has intra-regional Governmental co-ordination and cooperation. The Mongolian President was in Beijing last week on a State visit, with the country a key transit player between Russia and China. The Russian and Chinese governments have also been cooperating over the development of the Russian Far East, with intra-governmental agreements on development strategy, trade and investment being agreed and others in process.
Underneath this and again largely under the radar is the presence of Vladivostok as a rapidly growing Port providing South Asian access to the complete Russian, and Central Asian markets via the Trans-Siberian and its various connecting routes. Both Vietnam and India have already begun regular direct maritime services, and while these are concentrating mainly on energy supply chains – India is also an investor in several Siberian gas fields – an increasing amount of non-energy components are also taking advantage. Other South Asian countries and especially those in the ASEAN bloc are also now starting to pay attention – as was noted in the recent ASEAN-Russia forum as part of the East Asia Summit in November, held in Phnom Penh.
Clearly, the conflict in Ukraine is shifting Russian supply chains east – with the Russian Far East a major beneficiary of this change in Eurasian dynamics.
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